Risk markets

Trading Currencies: Wanting Risk and Overbuying Risk are Two Different Things

Two big risk-on events this week have put a rocket under risk markets.

  1. President-Elect Joe Biden declaring victory but with possible checks and balances from a Republican Senate, a win-win according to the market.
  2. A COVID-19 vaccine from Pfizer and BioNTech providing very promising results from stage 3 trails.

The surge in risk buying has been going on now since Biden’s lead in major swing states took over (late last Wednesday night). The news that the stage 3 Pfizer/BioNTech trials (which is a very crucial stage in vaccine development) prevented more than 90% of symptomatic Covid-19 infections in over 40,000 volunteers is not only the most encouraging scientific advance to date, but it’s a sign that 2021 will likely be very different to 2020.

Too early to go for risk-on markets?

Risk FX initially took all of this as a signal to ‘turn on’ however as time progressed, it was also clear that risk has a dilemma. These positive external factors are over 6 months away from taking effect and possibly 9 months in respect to the COVID-19 vaccine reaching full herd-immunity. According to Pfizer, 50 million doses will be supplied by the end of this year.

There are some short-term risks that need to be considered.

EUR/USD

Second and third waves in the northern hemisphere are reaching new record infection levels (with the US recording over 130,000 cases in a single day), the impact on consumption and confidence will be huge. It may explain why EUR/USD has been patchy even after reaching a 2-month high.

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The pair clearly hit a resistance and that looks to be an issue for it going into the long winter months of the Northern Hemisphere. It is not helped by the knock-on from surging US yields.

Yet, according to the economists at Rabobank, they are optimistic about the pair as they have curtailed their predictions and revised their “three-month EUR/USD forecast to 1.17 from 1.16” and their “6-month forecast to 1.18 from 1.14” based on a lower expectation of the USD.

GBP/USD

The other issue is Brexit, the 31st of December is looming large, Westminster is far from united and the EU is running out of patience this could make the end of the year very tricky for the GBP. It is one risk to watch. Traders should also pay attention to the 26th of November, which will be the date when the trade deal must be negotiated and presented to the European Parliament.

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This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation and therefore it should not be relied upon as such. You should seek your own advice.